Why Bridgewater is big in Australia

Hedge funds are secretive by nature, but Bridgewater’s mercurial founder, Ray Dalio, is open about the hundreds of principles that underpin its ethos.
AFR

by
Vesna Poljak

It’s the $US150 billion ($171 billion) hedge fund with peerless performance, shaped by the principles of a fearsome genius. Connecticut-based
Bridgewater Associates
has long been known as one of the world’s biggest and most innovative asset managers.

But the fund also boasts a remarkable Australian connection, making it one of the biggest external alternative managers of ­Australian assets. It counts the Future Fund, MLC and at least five industry super funds as clients on these shores, according to an analysis by The Australian Financial Review.

For the uninitiated, the defining characteristic of Bridgewater is its focus on fostering a culture of honesty and debate under which employees – currently numbering 1400 – have to constantly challenge their own and each other’s assumptions or, as Wall Street talk would have it, they won’t last.

Hedge funds are secretive by nature, but the firm’s mercurial founder,
Ray Dalio
, is open about the hundreds of principles that underpin the Bridgewater ethos: “Create a culture in which it is OK to make mistakes, but unacceptable not to identify, analyse, and learn from them"; and “truth – more precisely, an accurate understanding of reality – is the essential foundation for producing good outcomes".

The Future Fund’s chief investment officer, David Neal, was familiar with Bridgewater well before he joined ­Australia’s biggest manager of public sector retirement money.

“For me, the key component of Bridgewater’s edge is that they emphasise the very constant and relentless effort to improve their understanding of how economies and markets work," he says. “They do that in a highly systematic way and that requires extraordinary discipline, but the benefit of that is the learnings don’t get lost. If you have a discipline of immediately ­creating a system around what you’ve learned and coding it into a process, then it lasts . . . you could think about it as they tend to never forget."

Performance figures obtained by the Financial Review show that Bridge­water has delivered. It distinguished itself during the years after the global financial crisis, but the flagship Pure Alpha strategy has returned on average 13.6 per cent a year net of fees since 1991.

The separate All Weather strategy has an annualised return of 8.8 per cent net of fees since 1996.

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‘Street smart, academic intelligence’

Clients say they like the zero correlation to equities, which perhaps adds to Bridgewater’s relevance in the equities-centric Australian investment market. They also say they are untroubled by what reports suggest is a period of recent underperformance when Pure Alpha – unsurprisingly – failed to match what was the best year for the S&P 500 since 1997.

Former United States Federal Reserve chairman
Paul Volcker
told The Economist in 2012 that he sometimes felt Dalio “has a bigger staff, and produces more relevant statistics and analysis" than the Fed. But for all the influential supporters Dalio has in the highest corners of power, it is Bridgewater’s track record of performance that keeps institutional clients loyal.

Hostplus chief investment officer Sam Sicilia found Bridgewater quickly ticked a lot of boxes for its alternative mandate. “When you find a smart, intelligent and skilled investor you’ll want to give them money," he says.

“And [by that] I mean street smarts, academic intelligence and skill, as in ‘we’ve been around a long time and we’ve seen it before’. In Bridgewater we have those characteristics – that is the reason to appoint any manager for us."

He’s a fan of Bridgewater’s daily ­bulletin, which is at the top of his reading list, even if he doesn’t always agree with the analysis. It’s part of an intellectual exchange which informs his thinking about other investments.

“Ray Dalio would have to be one of the smartest investors on the planet. The reality is, here is an individual who runs an organisation who’s amassed a huge amount of personal wealth. But why? This is what they offer their ­clients; they’re good at what they do."

He says that if he got four pieces of advice from four different sources in the market and had no personal bias towards any outcome, “you wouldn’t bet against the Bridgewater one".

MLC’s head of alternative strategies, Gareth Abley, says the National ­Australia Bank-owned wealth manager has been invested in Pure Alpha since 2007 and had links to the hedge fund before that. There are tremendously clever people running hedge funds and all of them have a view on the market. But Abley, and others, allude to a depth few funds could match.

‘A constant search for truth and excellence’

“Essentially they’ve codified what they think are the cause-and-effect ­relationships between different parts of the economy and the markets," he says.

“Every time new information comes in, they’ve already worked out the implications for, say, the US dollar and the Norwegian krone." And this comes back to the culture Dalio has fostered.

“People find out pretty quickly whether they like working there or not – it’s not the place to go to have your ego stroked . . . It’s a very hard firm to work for, but it’s a great firm to be invested with," Abley says.

At the Future Fund, the exchange of ideas is even closer. Future Fund managers have travelled to Connecticut for stints at the headquarters and contact is frequent. Neal can see how Dalio’s principles translate to the market because they address the human element to investing. “One of the ways that Ray Dalio describes it is as a constant search for truth and excellence . . . Sometimes truth is uncomfortable – in human nature we shade the truth a little so as not to offend someone or upset someone," he says. The culture which springs from that accelerates learning. “I think that’s extremely powerful."

Neal doesn’t think that environment would suit everyone, or that Dalio is trying to impose his principles outside Bridgewater. But he gets the sense that Dalio also has bigger ideas in mind about “trying to improve the system".

It is a similar ambition that has helped elevate
George Soros
’s stature beyond fund manager.

On the other hand, Australians believe that if Dalio moved on, Bridgewater would probably be sustainable.

“They’ve been very thoughtful about how they’ve managed the transition from a Ray Dalio-centric firm to [what is] potentially a post-Ray institution," says MLC’s Abley.

The Future Fund’s Neal agrees. “If Ray decided tomorrow that he was just going to do fly-fishing, then I don’t believe the Bridgewater culture would weaken considerably at all."

There is another element to Bridgewater’s Australian connection – and that is the role of the late Bill Mahoney, who ran Bridgewater’s marketing department from 1998 to 2004.

Mahoney retired in 2006 and passed away last year, but is said to have been instrumental in building up the ­Australian business with his knowledge of this market, having previously worked at Banker’s Trust.

Marc Faber, publisher of the Gloom, Boom & Doom report, told the Financial Review last year that there were two ­reasons Bridgewater was so dominant: because Dalio is such a brilliant investor and Mahoney – an American who started out on Wall Street – was such a brilliant salesman.